High oil prices start pushing air fares higher

Cebu Pacific Air, a budget airline that controls more than half of the domestic market, said average fares in the first quarter of 2018 rose by 10 percent, propping up revenue and helping it post a growth in profit during the period.

The fare increase was bigger than the 2.6-percent increase for the same period last year and the 3.8 percent rise for the whole 2017. It was made in response to the almost 19-percent jump in jet fuel spending.

The development followed the announcement by Philippine Airlines early this year that it sought regulatory approval to allow it to bring back the fuel surcharge, which is added to the ticket price. The practice that was scrapped three years ago given the sharp decline in global oil prices.

The International Air Transport Association said higher oil expenses were a big concern for airlines. In its latest financial monitor, oil prices in April 2018 stood at around $75 a barrel, up 50 percent from last year. It said prices were at the highest level since late 2014.

“Since last year, fuel prices have been creeping up, resulting in higher operating expenses. Fuel accounts for about 35 percent of total operating costs,” said Charo Logarta Lagamon, Cebu Pacific communications director. “Coupled with the weakening of the peso versus the dollar, the rise in fuel cost has seen our expenses increase by double-digit levels,” she added.

Lagamon noted that the increase in expenses far outpaced the fare hikes implemented over the course of the first quarter, adding that expenses were being managed through “various mitigating measures.”

There is a limit to how far budget airlines like Cebu Pacific, which is targeting to grow passenger volume by 12 percent this year, can increase fares.

Regional consultancy firm CAPA-Center for Avaiation noted that budget carriers led an era of expansion that allowed ever broader market segments to travel by air. This also means that a large base of flyers today are “highly price sensitive travelers.”

“As fuel prices rise, the industry will once again be in the mode of refocusing to adjust to a new cost and competitive environment. The more they rise, the greater the challenge, as price sensitive discretionary travelers are deterred,” CAPA said in its 2018 outlook report.

Philippines Air Asia, part of Malaysia’s Air Asia Group, is closely monitoring fuel prices but it has chosen not to implement a fare increase thus far.

“We don’t need it at the moment,” said Dexter Comendador, CEO of Philippines Air Asia.

Philippines Air Asia is seeking a bigger slice of the domestic market. In 2017, it managed to increase its domestic share to 14 percent, up from 11 percent, CAPA said. The rest of the industry is dominated by PAL and Cebu Pacific.